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German Tax-Reduction Package Clears First Hurdle

Jeremy Hetherington-Gore, Tax-news.com, London

19 May 2000

Germany's lower house of parliament passed Chancellor Gerhard Schroeder's tax reduction package on Thursday, but the opposition said it would oppose the meaures in the upper house next month, where it has a majority.

The plan, which includes total tax reductions of $40bn over the next four years, includes a reduction in corporation tax from 40% to 25% in 2001, and reductions in personal income tax rates - the top rate would fall from 51% to 45%, and the lowest rate from 23% to 15%.

The conservative opposition is not against tax cuts, indeed it wants more of them, particularly for the small family-owned businesses that are so important in Germany's economy. Christian Democrat leader Friedrich Merz repeated last night that he was interested in a compromise. 'We don't want to let this fail,' said Merz. 'We want a result.'

Finance Minister Hans Eichel, who is in charge of the bill, urged the opposition not to derail tax reform, saying it could further weaken the struggling euro. 'I say this partly with a view to the euro's current weakness,' Eichel said during Thursday's parliamentary debate. 'If you block reforms, you provide arguments for the sceptics.'

The tax reforms, combined with cost-cutting aimed at balancing the budget by 2006, are the centre-piece of Schroeder's plans for modernising Germany's sclerotic economy - and have more than passing importance in his plans for re-election in the meantime. The tax cuts are chiefly aimed at families, and will have the effect of boosting consumer demand. The government hopes for higher tax receipts as a result of economic growth.

The newly-found enthusiasm of the Social Democrats for an almost Reaganesque supply-side economic programme would have seemed a wild fantasy just a few years ago. Equally improbable in the mouth of a German social democrat is a comment made last night by deputy Reinhardt Schultz: 'We would be ridiculed on Wall Street if we didn't have the courage to make a new start'. On Wall Street! That leaves France as the only defender of traditional cloth-eared EU social cohesion. You wouldn't catch a French politician saying anything polite about Wall Street.

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